GLOBAL LEADERS PORTFOLIO - 8-YEAR ANNIVERSARY UPDATE | DECEMBER 2022 - EQUITYCOMPASS
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The Growth
Opportunity from
Robert G. Hagstrom, CFA
Leading Companies
Chief Investment Officer
Senior Portfolio Manager
Around the World
hagstromr@equitycompass.com
(443) 224-1231
Global Leaders Portfolio
8-Year Anniversary Update | December 2022
“The best business to own is one
that over an extended period
can employ large amounts of
incremental capital at very
high rates of return.” 1
— Warren Buffett
Global Leaders Portfolio (GLP)
8-Year Anniversary Review
Years from now, when investors look back on 2022 they will
remember a year when growth stocks—which recently had
been the best performing equity class—suffered the worst
absolute and relative performance in over 10 years. The
Global Leaders Portfolio (GLP) was not immune. After
outperforming the MSCI ACWI Index four out of the last five
years on a gross basis, GLP also endured its worst absolute
and relative performance since inception.
Changing fortunes deserve an explanation. Simply stated,
deciphering the growth rout of 2022 can be reduced to three
factors: (1) higher interest rates due to the rise in inflation,
(2) a significant increase in the price of the U.S. dollar relative
to other major currencies, and (3) slowing economic growth.
With the onslaught of the COVID-19 global pandemic in
2020, Congress and the Federal Reserve (Fed) sensed no
worth less. However, in our opinion, the selloff in high quality
choice but to inject trillions of dollars into the economy in an
growth stocks has been grossly overdone with declines in
effort to prevent a catastrophic outcome—a potential
share prices much worse than those experienced during the
economic depression. Thankfully, due to stimulus programs,
2020 COVID-19 pandemic or even the 2008 Financial
we have been able to avoid the worst result, but the aftermath
Crisis—more dire economic environments.
has resulted in another problem—higher prices.
The rapid increase in interest rates has also caused the value
With so much money held by
of the U.S. dollar, relative to other
consumers chasing hard to find
goods—hobbled by a fractured
The selloff in high quality growth international currencies, to rise. The
stocks has been grossly overdone U.S. Dollar Index (DXY) closed
global supply chain that struggled to
with declines in share prices much year-end 2021 at 95.67. By the third
meet demand—the economic
consequence has been continued worse than those experienced during quarter of 2022, the DXY traded at
112.60—a quick 17% increase to now
high prices. From 2015 through 2019, the 2020 COVID-19 pandemic or
its highest level in over 20 years. A
the annual rise in the Consumer Price even the 2008 Financial Crisis—
strong dollar cuts both ways. For
Index (CPI) averaged 1.6%—below more dire economic environments. American consumers, the strong
the Fed’s target of 2.0% inflation. In
purchasing power of the dollar can
2021, however, the CPI jumped to
buy more when traveling abroad. For
4.7% with estimates for 2022 projecting a year-over-year rise
U.S. multinational corporations, the rise in the dollar can
reaching 8.0%—the highest level since the 1970s.
make their products and services less affordable for
It is not inflation, in and of itself, that caused the growth rout international consumers. In the Global Leaders Portfolio,
of 2022 but the necessity to raise interest rates in order to international revenues account for 63% of the total. As such,
tamp down inflation. At the end of 2021, the Fed signaled a the rise in the dollar has impacted even U.S. domiciled
pivot from a passive attitude about when to raise interest rates companies within GLP that rely on significant growth from
to an all-hands-on-deck rallying cry to immediately increase global sales and profits.
rates in an effort to squash the dramatic rise in prices. Higher
The rise in interest rates and strength of the dollar are now
interest rates throttle economic demand, which in turn, works
occurring against a landscape of slower gross domestic
to lower inflation over time.
product (GDP) growth both in the U.S. and around the world.
On the other hand, rising interest rates also impact asset Estimates for U.S. Real GDP growth in 2022 are down to 1.7%
prices, particularly long duration assets like long-term bonds from stimulus-inspired growth of 5.9% in 2021—a significant
and growth stocks. Higher interest rates make growth stocks downshift in growth year-over-year. In 2023, U.S. Real GDP
EquityCompass Investment Management, LLC
8-Year Anniversary Update | December 2022
growth is expected to fall even further—to an annualized reversing, leaving only wage growth and rent—two major
rate of 0.4%. The International Monetary Fund (IMF) CPI components. Here we believe the news is encouraging.
estimates global growth will slow from 3.2% in 2022 and Apartment interest has turned negative and job openings
2.7% in 2023. We documented the challenges the stock have declined—both welcome news for the Fed who would
market can encounter when confronted with decelerating like to see demand cool for workers, thereby reducing
economic growth. The market tends to struggle to rationally wages without triggering a spike in unemployment.
price cyclically declining growth believing the change may If inflation turns downward, the Fed may pause—perhaps in
be permanent. However, historically, economies have a positon to lower interest rates. In the case that the Fed
recovered and so has the stock market. lowers interest rates, the strength of the dollar should
reverse. Lower interest rates can subsequently work to
reposition the economy back to its long-term sustainable
Whether the economy is expanding or
growth rate of 2% real GDP.
contracting, and whether interest rates are
rising or falling, we steadfastly seek to own During a bear market, when economic uncertainty is high,
a focused portfolio of leading businesses in investors tend to shorten their time horizon and prefer to
the world no matter the environment. play defense. However, a compressed time horizon during
such periods of uncertainty can often generate the greatest
long-term payoff. Bear markets bring lower prices, but
these lower prices have potential to provide above-average
The trifecta of rising interest rates and the strength of the returns in the years that follow. In our view, it is not a
dollar against a backdrop of slower economic growth have question whether or not growth investing will return to
collectively contributed to GLP’s poor 2022 price favor, but rather a question of when. Although we cannot
performance. Nevertheless, we believe GLP’s recent predict exactly when growth investing should start to
underperformance is not a result of investment process,
"
outperform, based on current price levels, the future rate of
which remains consistent and a key component to its history return for high quality growth stocks appears to be its most
of outperformance. Rather, this year’s underperformance attractive in over a decade.
has been largely a result of the massive shift in
macroeconomics. GLP is macro-economically aware but we
remain macro agnostic. Whether the economy is expanding
or contracting, and whether interest rates are rising or
falling, we steadfastly seek to own a focused portfolio of
leading businesses in the world no matter the environment.
With this said, we believe the markets have come to grips
with the realization of an unlikely “Fed Pivot”—from raising Although we cannot predict
interest rates to suddenly lowering interest rates. The best
outcome for the stock market, in our opinion, would be a
exactly when growth investing
“Fed Pause”—reaching an endpoint of increasing interest should start to outperform,
rates to monitor the economic aftereffect following a year of
raising interest rates at the fastest clip since the 1970s. based on current price levels,
A Fed pause will be determined if inflation statistics not only the future rate of return for high
signal that rising prices have peaked, but that they have
begun a pronounced downward trajectory. Thus far, quality growth stocks appears
reportings have signaled that gross domestic product (GDP) to be its most attractive in over a
growth is slowing, corporate and consumer demand is
waning, and that agricultural prices, hard commodity decade.
prices, housing, appliances, and car prices are all trending
lower. Many of the conditions that caused high inflation are
www.equitycompass.com 3
Global Leaders Portfolio (GLP)
Business-Driven Investing
The investment process we employ for GLP is called
business-driven investing. Everything from stock selection
to portfolio management is seen through the lens of a
business owner—not a stock trader. Stock selection is based
on the principles a business-owner would demand when
purchasing a company and our portfolio management
approach is similar to how one might oversee a collection of
companies. Lastly, in thinking about performance, similar to a
business owner, we focus on the economic progress of our
companies knowing full well that, over time, stock prices
reflect economic returns.
Taken together, we believe GLP’s business-driven approach
to investing offers many distinct advantages that can enable
an investor in the pursuit to compound wealth over a multi-
year period.
What Business Characteristics Do We Look For?
The primary objective of most business owners is to generate To generate a high return on capital speaks to a company’s
a profit—specifically, cash. business model. To generate a high return over an extended
period of time speaks to the total addressable market in
Business owners understand and appreciate the importance
which a company competes.
of cash—and so should investors. A business that generates
cash can reinvest it back into the business to help it grow. A Think of the total addressable market as the total size of the
business owner can also use cash to pay a dividend to market—the amount of revenue a company would generate if
shareholders. Cash is what makes the twin objectives of it captured 100% share of the total market.
growth and income possible, and one There are 330 million people who
of two major financial factors investors
should consider when investing.
GLP seeks to own leading businesses live in the United States and 8.0
in the world—those that generate a billion people in the world.3
The second important financial factor Roughly speaking, 96% of the
very high rate of return on capital
investors should understand is return world’s population lives outside the
with the ability to reinvest cash back
on invested capital. Finance theory United States. While the U.S. is a
into the company because its wealthy market, the overall size of
stipulates a company that earns a cash
return above its cost of capital creates
products and services are in high the world market suggests there
shareholder value while a company demand from consumers in more are significant opportunities to sell
that earns below its cost of capital than 100 countries around the products and services around the
summarily destroys shareholder value. world—an opportunity that should globe.
Furthermore, it is accepted once a last for decades. Putting this together, GLP seeks to
company generates a cash return own leading businesses in the
above the cost of capital, sales growth world—those that generate a very
then becomes a proxy for the growth of the intrinsic value of high rate of return on capital with the ability to reinvest cash
the company. back into the company because its products and services are
According to Warren Buffett, “The best business to own is one in high demand from consumers in more than 100 countries
that over an extended period can employ large amounts of around the world—an opportunity that should last for
incremental capital at very high rates of return.” 2 decades.
EquityCompass Investment Management, LLC
8-Year Anniversary Update | December 2022
Managing the Global Leaders Portfolio
In the money management industry, portfolio managers are companies in a position to compound the growth of intrinsic
trained in the basics of Modern Portfolio Theory which value of their business over many years.
emphasizes broad portfolio diversification in order to reduce The investment objective for GLP is not to interfere with the
the variance of price returns. However, in our opinion, compounding of intrinsic value that occurs among its
owning too many stocks as a means to minimize price companies. We are quite content to indefinitely hold on to
volatility can have the unhappy effect of sub-optimizing investments as long as the companies continue to generate
long-term investment returns. high returns on capital,
Secondly, and more problematic for Investors should remember a management competently reinvests
investors, obsessing over short- short-term quotation loss is not a the cash returns, and the stock
term price dips can lead to permanent capital loss unless market does not overvalue the
speculative habits—frequent the position is sold. business.
buying and selling of stocks—in an We do not sell stocks simply
attempt to keep the portfolio from because they have appreciated or
declining over the short-term. Warren Buffett put it succinctly have been owned for a long period of time. Indeed, of the 25
when he said, “If the investor fears price volatility, erroneously companies currently owned in GLP, 14 are legacy stocks—
viewing it as a measure of risk, he may, ironically, end up held throughout the last eight years, since inception. In our
doing some very risky things.” 4 Investors should remember a opinion, one of the most foolish maxims bantered about Wall
short-term quotation loss is not a permanent capital loss Street is “you can’t go broke taking a profit.” This may be true,
unless the position is sold. but selling a great company that is compounding intrinsic
The portfolio management strategy employed within the value at a high rate of return just to take a profit, in our
Global Leaders Portfolio seeks to concentrate investments in opinion, is no way to build long-term wealth.
a select number of, what we believe, are attractive
Of the 25 companies currently owned in GLP, 14 are legacy stocks—
held throughout the last eight years, since inception.
www.equitycompass.com 5
Global Leaders Portfolio (GLP)
Compounding Wealth – Taking the Marshmallow Test
The marshmallow experiment was a 1972 psychological study on delayed gratification led by
the Stanford University professor Walter Mischel. In the experiment, children were offered a
choice between eating one marshmallow now or two marshmallows later. Leaving one
marshmallow on the table in front of the child, the researcher left the room for 15 minutes then
returned. If the child had not eaten the marshmallow, a second marshmallow was awarded. In
follow up studies, researchers discovered those children who were able to wait longer for the
second marshmallow tended to have a more favorable outcome in life than those who quickly
ate the first marshmallow.
One might ask what a marshmallow eating study has to do with investing. Interestingly, it
appears delayed gratification can also play a role in building long-term wealth but, instead of
marshmallows, the concept relates to short-term stock price gains. In behavioral finance this is
called “hyperbolic discounting”—a cognitive bias whereby investors choose smaller, immediate rewards rather than larger,
later rewards. Many investors have difficulty resisting the temptation to capture short-term profits versus the potential for much
larger profits later.
Investment in GLP illustrates the financial benefit that can accrue
when willing to delay immediate gratification—the taking of As long as GLP’s businesses continue to
short-term gains. GLP is a focused, low turnover portfolio that seeks grow while generating a high return on
to own businesses for the long-term in order to take advantage of capital, we are quite content to own these
the economic compounding that comes from growth companies attractive companies year after year.
able to produce a high return on capital. As long as GLP’s
businesses continue to grow while generating a high return on
capital, we are quite content to own these attractive companies year after year.
To demonstrate the potential benefits of buying and holding we evaluated the performance of GLP’s longest-held stock
positions. Of GLP’s current 25 companies, 14 have been owned since inception on July 1, 2014. Refer to the adjacent table of
GLP’s legacy businesses along with their stock price performance compared to its benchmark, the MSCI ACWI Index.
Of GLP’s 14 legacy businesses, 13 have outperformed the benchmark over the past eight years. By far, the best performer, has
been Apple Inc. (AAPL)—not only a steady grower over the years but also earning a very high rate of return on capital. Although
AAPL does reinvest a good amount of its profits, it has also generated a significant amount of excess cash, which has allowed
the company to repurchase shares in the open market. How much stock has Apple repurchased? In the last 10 years, Apple has
repurchased $522 billion in stock reducing its share count from 26.3 billion shares to 16.1 billion shares today. Repurchasing a
half trillion dollars in stock over 10 years is equivalent to the market value of the seventh largest company in the S&P 500 Index.
Of GLP's 14 legacy businesses, GLP’s only underperforming stock against the benchmark has been Unilever plc (UL)—an English
company that manufactures personal/home care products and food. The company has 400 brands serving consumers in over
190 countries worldwide. In the first six years GLP owned Unilever, the company significantly outperformed its benchmark 51%
Investing in high-quality companies at what we believe are rational prices,
taking sizable positions, and holding for several years used to be sensible
investing. In today’s highly speculative market, long-term investing can be
rare but it’s what we do.
EquityCompass Investment Management, LLC
8-Year Anniversary Update | December 2022
versus 39%, respectively. After a series of Performance of GLP's 14 Compounding Legacy Stocks
managerial gaffes, however, UL suffered All holdings as of 9/30/2022 held in GLP since inception
two back-to-back years of relative price (6/30/2014 - 9/30/2022)
underperformance. Average Annual
Total Return
Return
On July 20, 2022, Nelson Peltz, founding
Partner of Trian Fund—an activist MSCI ACWI 50.54% 5.08%
management firm —was appointed to Apple, Inc. (AAPL) 565.95% 25.81%
the Unilever Board of Directors. Peltz
Mastercard, Inc. (MA) 307.21% 18.54%
previously served on the Board of
Directors of The Procter & Gamble LVMH Moët Hennessy Louis Vuitton SE (LVMUY) 287.44% 17.82%
Company (PG) from 2018–2021 and The Estée Lauder Companies, Inc. (EL) 217.30% 15.01%
gained experience in helping to turn
around the struggling consumer PayPal Holdings, Inc. (PYPL)† 209.12% 14.66%
products company. We believe Nelson Brookfield Asset Management, Inc. (BAM) 139.45% 11.15%
Peltz can be instrumental in helping
Nike, Inc. (NKE) 134.06% 10.85%
Unilever regain its outperforming
capabilities. BlackRock, Inc. (BLK) 111.60% 9.50%
GLP investors have been the Berkshire Hathaway, Inc. (BRK.B) 110.98% 9.46%
beneficiaries of long-term compounding. TE Connectivity Ltd. (TEL) 109.02% 9.34%
Our strategy has been to avoid taking
quick profits in our businesses and QUALCOMM, Inc. (QCOM) 82.92% 7.59%
instead maintain the discipline to hold Nestlé SA (NSRGY) 72.46% 6.82%
out for potentially greater returns later.
Diageo Plc (DEO) 65.20% 6.27%
Our goal is not to capture a great deal of
smaller returns in the shortest period of Unilever Plc (UL) 26.96% 2.93%
time. Rather, we seek to maximize Source: Bloomberg Finance, LP
investment returns over the long-term. † PayPal Holdings, Inc. (PYPL) was acquired by spin-off from original EBAY, Inc. (EBAY) position held at
portfolio inception. Performance calculation shows the return of EBAY from 6/30/2014 – 7/10/2015
We see GLP’s glacial 13% average annual combined with the return of PYPL from 7/10/2015 – 9/30/2022.
turnover ratio as anomalous. Investing in
high-quality companies at what we
believe are rational prices, taking sizable
positions, and holding for several years used to be sensible investing. In today’s highly speculative market, long-term investing
can be rare but it’s what we do. We see no reason to sell GLP’s leading businesses simply because prices have gone up a lot or a
certain amount of time has passed.
For illustrative purposes only and not intended as personalized recommendations. The specific securities identified and described herein do not represent all of the securities
purchased, sold, or recommended to advisory clients, and the reader should not assume that investments in the securities identified and discussed were or will be profitable. A
complete list of all recommendations made by the firm is available upon request.
www.equitycompass.com 7
Global Leaders Portfolio (GLP)
Compounding an Unrealized Capital Gain
Long-term compounding might be uninteresting for some investors due to lack of activity. Good economic returns that can
be sustained over the long-term, though, can lead to outsized investment gains. There is an additional financial benefit to
being a buy-and-hold investor that is often overlooked.
Although GLP is owned in many tax-advantaged accounts, where paying short-term and long-term capital gains may be of
no consequence, there are a great number of investors who own the portfolio in taxable accounts. For these accounts,
investors can earn additional dollars that accrue by compounding unrealized capital gains.
All taxable accounts, if they sell GLP at a profit, must settle up with the IRS. The longer you own an unrealized gain, the
longer you can compound this tax-deferred gain before it will eventually be paid. Compounding a large number, even if it
includes a temporary tax deferral from the IRS, makes future returns higher.
The longer you own an unrealized gain, the longer you can
compound this tax-deferred gain before it will eventually be paid.
Compounding a large number, even if it includes a temporary tax
deferral from the IRS, makes future returns higher.
EquityCompass and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide,
and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
EquityCompass Investment Management, LLC
8-Year Anniversary Update | December 2022
Diversify Your Time Horizons
Investors typically distinguish portfolio strategies by
market cap (small/mid/large) and by style (growth
or value). Some investors also diversify by hiring
portfolio managers with different investment
processes—quantitative, momentum, macro-
trading, and fundamental analysis, are a few
examples.
An often overlooked portfolio contribution is the
benefit of having different time horizons. While
some portfolio managers may have a stated
objective to provide long-term results, their actions
in pursuit of this goal may be decidedly one-sided—
nothing more than a collection of short-term trades.
We believe it would be a helpful exercise for
investors to analyze different portfolio managers to
ascertain who is investing for the short-term versus
those that are more long-term oriented. Investors
should ask the question – “Am I diversified by time horizon?”
The Global Leaders Portfolio strategy is a business-centric, focused, low turnover portfolio strategy—not the sum total of
short-term strategies.
In our opinion, investors would be well-served by evaluating and comparing the equity strategies they currently own to GLP. In
"
doing so, investors may discover GLP cannot only create value but is also an important time horizon diversifier with its long-term
approach.
Investors may
discover GLP
cannot only create
value but is also an
important time
horizon diversifier
with its long-term
approach.
www.equitycompass.com 9
Global Leaders Portfolio (GLP)
It’s Never a Bad Time to Buy Leading Businesses at Good Prices...
But It's A Great Time When They Are Undervalued
The growth stock rout of 2022 has been painful. It has also
dramatically changed the valuation landscape. We believe
the silver lining is long-term investors can now find attractive
entry points to buy high-quality businesses with consistent
profitability, that are also in a position to deliver attractive
growth going forward.
The market selloff moved many investors to jettison growth
stocks in favor of low volatility value stocks with low price-to-
earnings (P/E) ratios that have a tendency to decline less in a
bear market. Although value stocks substantially
outperformed growth this year, the relative outperformance
has shifted many of the value sectors to fair value. In some
cases value stocks have become expensive.
Based on our research, and supported by Morningstar, the stocks in GLP are trading at
an average 25% discount to fair value with an implied return to intrinsic value of 33%
-- the cheapest valuation since inception.
"
According to Morningstar Research, the best performing stocks that typically decline relatively less during market
sectors in the market this year have been Energy, Utilities, and downturns. As of 9/30/2022, Morningstar reports these
Consumer Staples. These sectors house the defensive value three sectors are trading at fair value.
The worst performing sectors this year include the secular
growth stocks that have been the worst performers this
year—Communication Services, Consumer Discretionary, and
Information Technology. However, according to Morningstar,
these three sectors are now trading at 75% of fair value—the
cheapest prices since the 2008 Financial Crisis.
As history has proven, It is important to note, 70% of the Global Leaders Portfolio is
invested in the Communication Services, Consumer
economic recessions and Discretionary, and Information Technology sectors, which
include many of the leading businesses in the world. The bad
bear markets eventually news is these sectors have contributed to GLP’s poor
end thereby leading to performance this year. On the bright side, these sectors now
offer the highest future rate of return back to fair value
higher future investment compared to all other sectors in the market.
returns. Based on our research, and supported by Morningstar, the
stocks in GLP are trading at an average 25% discount to fair
value with an implied return to intrinsic value of 33%—the
cheapest valuation since inception.
Investors are not often afforded an opportunity to buy leading
businesses at these low prices. Generally such opportunities
EquityCompass Investment Management, LLC8-Year Anniversary Update | December 2022 have been associated with scary macroeconomic periods such as the 2008 Financial Crisis and the COVID-19 global pandemic. Today, with the fastest rise in interest rates in 40 years on the back of the highest inflation readings since the 1970s, investors are faced with another daunting macroeconomic environment. As history has proven, though, economic recessions and bear markets eventually end thereby leading to higher future investment returns. Knowing this, we are confident 2023 will likely prove to be a healthier and more profitable period for growth investors. In the "Lower for Longer" Environment, Growth is the Scarce Resource The decade following the 2008 Financial Crisis and prior to the onslaught of the COVID-19 global pandemic has been associated with the lower for longer economic environment—a period when inflation, interest rates, and economic growth fell to new historical low levels. Between 2010 and 2019, the yearly change in the Consumer Price Index (CPI) averaged 2.00%. The 10-year U.S. Treasury yield spent much of the decade between 2.00% and 3.00% with an average yield of 2.76%. Real U.S. GDP growth averaged 2.50%. With inflation at 8% and the 10-year U.S. Treasury yielding over 4%, readers might scoff at the idea of a new lower for longer environment, but economists are already forecasting much lower inflation and interest rates over the next few years. Consensus economic forecasts according to Bloomberg, which compile the outlook of over 60 economists, predicts inflation will fall to 4.0 % in 2023, then drop further to 2.5% in 2024. These same economists are now forecasting the average yield of the 10-year U.S. Treasury in 2023 to decline to 3.5%, then lower again to 3.2% in 2024. While a 2.5% inflation rate, with a 3.2% 10-year U.S. Treasury yield are higher than the average between 2010 and 2019, both are substantially below the levels reached between 1990 and 2009. Bloomberg forecasts U.S. Real GDP growth to be 0.4% in 2023 and rising to 1.4% in 2024—still well below our economy’s 2.0% long-term sustainable growth rate and much lower than the average 2.50% in the previous decade. Although we believe inflation and interest rates will be modestly higher in the years ahead, we believe economic growth will be lower over the same time period. In a slow growth environment the most valuable investment returns typically revert to those companies that can actually grow at an above-average rate. www.equitycompass.com 11
Global Leaders Portfolio (GLP)
The economic characteristics of the Global Leaders Portfolio reflect the returns of our leading businesses. On average, the free
cash flow yield from operations after capital expenditures of GLP’s holdings is 3.8%. The average annual return on invested
capital among GLP’s businesses is 19%—well above the average cost of capital (approximately 10%). Importantly, GLP’s
businesses are expected to grow sales, on average, at a 14% annual rate over the next three to five years. Once a company
generates a cash return above the cost of capital, sales growth becomes a meaningful barometer for detecting the growth of
intrinsic value. This being said, we believe companies that can generate above-average sales growth could be in high demand
in the forthcoming slower growing economy.
Global Leaders Portfolio (GLP) Economic Characteristics‡
19.0%
Average Return on
> 10.0%
Estimated Cost of
14.0%
Average 3–5 Year
Invested Capital Capital Based on Estimated Sales
(ROIC) Expected Market Rate Growth Rate
of Returns
Source: Bloomberg Finance, LP
Between 2010 and 2019, the average annual total
return of the S&P 500 Index was 13.54%. The average
annual return of the Russell 1000 Value Index was
below the broader market at 11.79%. Cyclical, capital
intensive value stocks require robust economic growth
to fully generate the returns from their business models.
What were the best performing stocks during the lower
for longer environment? The constituents of the Russell
1000 Growth Index provided 15.21% average annual
returns for growth investors, outperforming not only
value stocks, but the broader market as well. Because
growth is the scarce resource in a slow growing
economy, the stock market tends to reward those
companies that have the potential to achieve above-
average growth.
If we are heading towards lower economic growth, with
somewhat lower interest rates and inflation, we believe
the stock market environment could soon favor growth
stocks again. We believe the Global Leaders Portfolio is
not only well-positioned for the next economic cycle,
but is trading at a significant discount to intrinsic
value—a combination that could provide investors with
above-average future rates of return.
‡ Please refer to the Description of Terms on page 17 for more information on Global Leaders Portfolio (GLP) Economic Characteristics.
EquityCompass Investment Management, LLC8
8-Year Anniversary Update | December 2022
GLP 8-Year Anniversary Performance
As of 9/30/2022 GLP (gross) MSCI ACWI GLP (net)
YTD 2022 -33.76% -25.63% -35.29%
Annualized Returns
1-Year -27.59% -20.66% -29.76
2-Year -4.67% 0.55% -7.50%
3-Year 4.12% 3.75% 1.07%
4-Year 4.73% 3.15% 1.66%
5-Year 6.29% 4.44% 3.19%
6-Year 8.48% 6.69% 5.32%
7-Year 8.14% 7.42% 4.98%
8-Year 7.19% 5.55% 4.06%
Since the inception date, July 1, 2014, the Calendar Year Returns
Global Leaders Portfolio (GLP) has
2021 20.46% 18.54% 16.99%
produced a cumulative gross total return of
71.33% (34.10% net) compared to its 2020 29.98% 16.25% 26.25%
benchmark, the MSCI ACWI Index, which 2019 35.28% 26.60% 31.41%
returned 50.54%. On an annualized basis,
GLP has generated a gross 6.74% 2018 -9.64% -9.41% -12.33%
annualized return (3.62% net) compared to 2017 29.50% 23.97% 25.75%
our benchmark which has tallied a 5.08%
2016 4.23% 7.86% 1.12%
annual return. Our short-term and long-
term investment results are shown in the 2015 -2.24% -2.36% -5.09%
adjacent table. Since Inception (July 1, 2014)
Long-time Global Leaders Portfolio Cumulative Return 71.33% 50.54% 34.10%
investors will note a change in our long-
term net results. All net returns now reflect Compounded Annual Return 6.74% 5.08% 3.62%
the deduction of the maximum managed Net returns reflect the deduction of the maximum managed account fee of 3.00%
which includes the wrap sponsor fee and EquityCompass investment management
account fee of 3.00% which includes the fees. Actual fees may vary. Past performance is no guarantee of future results. Indices
wrap sponsor fee and the EquityCompass are unmanaged, do not reflect fees and expenses, and are not available for direct
management fee (0.35%). Thus GLP’s gross investment.
investment returns are now reduced by
3.00% on an annualized basis as reflected
in the net returns.
www.equitycompass.com 13Global Leaders Portfolio
As of 9/30/2022
Inception July 1, 2014
Number of Holdings 25
Benchmark MSCI ACWI Index
Weighted Avg. Dvd. Yield (%) 1.1
Weighted Avg. Mkt. Cap. ($ Bln) 376.8
Forward Price/Earnings Multiple 21.5x
Annual Turnover - 2021 (%) 6.4
Gross
June 30, 2014—September 30, 2022 | Past performance is no guarantee of future results. $214,723 Portfolio Benchmark
Net Standard Deviation (%) 19.32 17.01
$208,727
Sharpe Ratio 0.27 0.19
Benchmark
Beta 1.09 1.00
$170,753
R-Squared 0.91 1.00
Gross Alpha (%) 1.69 0.00
$171,335 Batting Average (%) 50.00 100.00
Net Up-Market Capture (%) 116.89 100.00
$100,000 $134,095
Down-Market Capture (%) 105.75 100.00
All risk measures are based on a 5-year time period using
monthly returns.
July 2014
7/1/2014
7/1/2014 Gross Net Benchmark
September 2022 12/31/2020
9/30/2022
The growth of $100,000 chart presented herein is for illustrative purposes only. The chart illustrates the growth of $100,000 had it been invested at the time of inception
and includes reinvestment of dividends. It does not assume withdrawals or contributions. Any results shown above may not represent the actual experience of individual
investors. Individual account performance may differ due to, e.g., account size, cash flows, investment restrictions, economic factors and fees.
3-Mos 6-Mos YTD 1-yr 3-yr 5-yr Incp. 2015 2016 2017 2018 2019 2020 2021
Gross % -5.98 -24.93 -33.76 -27.59 4.12 6.29 6.74 -2.24 4.23 29.50 -9.64 35.28 29.98 20.46
Net % -6.61 -26.06 -35.29 -29.76 1.07 3.19 3.62 -5.09 1.12 25.75 -12.33 31.41 26.25 16.99
Benchmark % -6.82 -21.41 -25.63 -20.66 3.75 4.44 5.08 -2.36 7.86 23.97 -9.41 26.60 16.25 18.54
As of 9/30/2022; Inception – July 1, 2014; Benchmark = MSCI ACWI Index
Net returns reflect the deduction of the maximum managed account fee of 3.00% which includes the wrap sponsor fee and EquityCompass investment management fees.
Actual fees may vary.
EquityCompass Investment Management, LLCGlobal Leaders Portfolio
As of 9/30/2022
% %
Large Cap - > $10 bn (%) 100.00 Information Technology 42.18
Consumer Discretionary 22.35
Consumer Staples 17.93
Financials 8.89
%
Communication Services 5.51
Alphabet Inc. Class A 5.51
Health Care 3.14
Apple Inc. 5.48
Amazon.com, Inc. 5.38
LVMH Moet Hennessy Louis Vuitton SE 5.37
QUALCOMM Incorporated 4.97
Mastercard Incorporated Class A 4.90
MercadoLibre, Inc. 4.62
TE Connectivity Ltd. 4.61
Unilever PLC 4.57
PayPal Holdings, Inc. 4.31
For illustrative purposes only and not intended as personalized recommendations. The specific
securities identified and described herein do not represent all of the securities purchased, sold, or
recommended to advisory clients, and the reader should not assume that investments in the
securities identified and discussed were or will be profitable. A complete list of all
recommendations made by the firm is available upon request.
2.9% 2.9%
5.4%
United States
5.8% United Kingdom
7.4% Switzerland
Netherlands
67.3%
8.5% France
Taiwan
Canada
U.S.,
36.8%
† Winning The $30 Trillion Decathlon: Going for Gold in
Emerging Markets, McKinsey & Company, August 2012.
International,
63.2% All charts and tables are calculated by EquityCompass
using data provided by FactSet Research Systems, Inc.
www.equitycompass.com 15Global Leaders Portfolio (GLP)
Portfolio Management Team
Robert G. Hagstrom, CFA
Chief Investment Officer
Senior Portfolio Manager
Robert is Chief Investment Officer of EquityCompass Investment Management, LLC and Senior Portfolio Manager of
the Global Leaders Portfolio. He joined EquityCompass in April 2014 and launched the Global Leaders Portfolio in
July 2014. Robert was appointed Chief Investment Officer in March 2019.
Robert has more than 30 years of investment experience. Prior to joining EquityCompass, he was Chief Investment
Strategist at Legg Mason Investment Counsel, and before that, the Portfolio Manager of the Growth Equity Strategy
at Legg Mason Capital Management for 14 years where he managed $7 billion in assets. Robert was the recipient of
the “Honorable Mention” as Morningstar’s Domestic-Stock Fund Manager of the Year in 2007.§
Robert is the author of ten investment books including The New York Times Best Seller, The Warren Buffett Way, widely considered to be
the definitive book on the investment approach and strategies of Warren Buffett. The book has sold over one million copies worldwide
and is translated into 17 foreign languages. In addition, Robert wrote, Investing: The Last Liberal Art, a multidiscipline examination of
investing and decision making. His latest book, published in 2021, is Warren Buffett: Inside the Ultimate Money Mind.
Robert earned his Bachelor’s and Master’s of Arts degrees from Villanova University. He is a Chartered Financial Analyst, a member of the
CFA Institute, and the CFA Society of Philadelphia. Robert is also a member of the Global Interdependence Center.
Lauren E. Loughlin
Associate Portfolio Manager
Lauren is an Associate Portfolio Manager at EquityCompass. She joined the team in May 2014 and helps manage
the Global Leaders Portfolio and is a member of the EquityCompass dividend team. Lauren is involved in all
aspects of the portfolio management process, including investment research and analysis, portfolio strategy, stock
selection, product marketing, asset and performance measurement, and client communications. She also leads the
women’s investing initiative at EquityCompass, has hosted several client events focused on women investors, and
has written extensively on the topic. Prior to joining EquityCompass, Lauren was a member of the Stifel Institutional
Equity Sales group, and she also previously worked at Morgan Stanley as an analyst in equity derivative client
service.
Lauren graduated magna cum laude with a B.S. in business administration from Washington and Lee University.
§ Established in 1988, the Morningstar Fund Manager of the Year award recognizes portfolio managers who demonstrate excellent investment skill and the courage to differ
from the consensus to benefit investors. To qualify for the award, managers’ funds must have not only posted impressive returns for the year, but the managers also must
have a record of delivering outstanding long-term risk-adjusted performance and of aligning their interests with shareholders’. Managers’ funds must currently have a
Morningstar Analyst Rating™ of Gold or Silver. A list of current Morningstar Medalists is available here to Morningstar.com Premium members. The Fund Manager of the Year
award winners are chosen based on research and in-depth qualitative evaluation by Morningstar’s Manager Research Group. For more information about Morningstar Awards,
visit https://go.morningstar.com/Morningstar-Awards.
Footnotes:
1. 1996 Berkshire Hathaway Annual Report
2. Ibid.
3. Magnin, Clarissse and BjÖrn Timelin, "Taking Stock As the World Population Hits 8 Billion," McKinsey & Company, November 13, 2022.
4. 2014 Berkshire Hathaway Annual Report
EquityCompass Investment Management, LLC8-Year Anniversary Update | December 2022 Description of Terms Alpha The relationship between the performance of the strategy and its beta over a three-year period of time. Batting Average A measure of a manager’s ability to beat the market consistently, the Batting Average is calculated by dividing the number of quarters in which the manager beat or matched an index by the total number of quarters in the period. For example, a manager who meets or outperforms the market every quarter in a given period would have a batting average of 100. A manager who beats the market half of the time would have a batting average of 50. Beta A measure of the volatility, or systematic risk, of a security or a portfolio relative to the market as a whole. A beta of one is considered as risky as the benchmark and is therefore likely to provide expected returns approximate to those of the benchmark during both up and down periods. A portfolio with a beta of two would move approximately twice as much as the benchmark. Down-Market Capture Ratio Down-Market Capture Ratio is a measure of managers’ performance in down markets relative to the market itself. A down market is one in which the market’s quarterly return is less than zero. The lower the manager’s down-market capture ratio, the better the manager protected capital during a market decline. A value of 90 suggests that a manager’s losses were only 90% of the market loss when the market was down. A negative down-market capture ratio indicates that a manager’s returns rose while the market declined. For example, if the market fell 8% while the manager’s returns rose 2%, the down-market capture ratio would be -25%. R-Squared R-Squared is a statistic that measures the reliability of alpha and beta in explaining the manager’s return as a linear function of the market. If you are searching for a manager with a particular style, for example a growth manager, you would expect that manager to have an R-Squared that is high relative to a growth index if the manager has a diversified portfolio. If the manager’s return is explained perfectly, the R-Squared would equal 100, while an R-Squared of 0 would indicate that no relationship exists between the manager and the linear function. Higher R-Squared values indicate more reliable alpha and beta statistics and are useful in assessing a manager’s investment style. Sharpe Ratio Sharpe Ratio is one of two alternative, yet similar, methods of measuring excess return per unit of risk. (The other method is the Treynor Ratio.) In the case of the Sharpe Ratio, risk is measured using the standard deviation of the returns in the portfolio. The Sharpe Ratio relates the difference between the portfolio return and the risk-free rate to the standard deviation of that difference for a given time period. Standard Deviation Standard Deviation is a gauge of risk which measures the spread of the difference of returns from their average. The more a portfolio’s returns vary from its average, the higher the standard deviation. It is important to note that higher-than-average returns affect the standard deviation just as lower-than-average returns. Thus, it is not a measure of downside risk. Since it measures total variation of return, standard deviation is a measure of total risk, unlike beta, which measures market risk. Up-Market Capture Ratio Up-Market Capture Ratio is a measure of managers’ performance in up markets relative to the market itself. An up market is one in which the market’s quarterly return is greater than or equal to zero. The higher the manager’s up-market capture ratio, the better the manager capitalized on a rising market. For example, a value of 110 suggests that the manager captured 110% of the up market (performed 10% better than the market) when the market was up. A negative up-market capture ratio indicates that a manager’s returns fell while the market rose. For example, if the market gained 8% while a manager’s returns fell 2%, the up-market capture ratio would be -25%. General Disclaimer on GLP Economic Characteristics: Below we describe the methodology used for the compilation of Average Return on Invested Capital (ROIC), Estimated Cost of Capital, and Average Estimated Sales Growth Rate as shown on page 12. Average Return on Invested Capital (ROIC) Average Return on Invested Capital is defined as the average ROIC of all the companies in the Global Leaders Portfolio. The ratio is based on the actual 12-month trailing returns reported by the individual companies as compiled by Bloomberg Finance, LP. Estimated Cost of Capital Estimated Cost of Capital is the assumed required rate of return for equity investors which is based on the compounded annual total return growth rate of the S&P 500 of approximately 10% since inception. Average Estimated Sales Growth Rate Average Estimated Sales Growth Rate represents the average 3–5 year expected sales growth rate of the companies in the Global Leaders Portfolio based on analysts’ consensus estimates as reported by Bloomberg Finance, LP. www.equitycompass.com 17
Global Leaders Portfolio (GLP)
Investment Performance Disclosure
GLOBAL LEADERS PORTFOLIO WRAP COMPOSITE (07/01/14 ‒ 12/31/21)
Composite Benchmark Composite Internal Portfolios With Composite Strategy Total
Gross-of-Fees Net-of-Fees Benchmark 3 Yr. Ex Post 3 Yr. Ex Post Number of Dispersion With Bundled Assets Assets Firm Assets
Year-End Return* Return** Return Std. Dev. Std. Dev. Portfolios (%) Fees (%) (USD Mil.) (USD Mil.)† (USD Mil.)
2014 § 2.4% 0.9% -1.9% N/A N/A 167 N/A 100% $15 $23 $1,929
2015 -2.2% -5.1% -2.4% N/A N/A 519 0.1% 100% $53 $65 $2,217
2016 4.2% 1.1% 7.9% N/A N/A 539 0.1% 100% $72 $76 $2,714
2017 29.5% 25.7% 24.0% 10.1% 10.5%8-Year Anniversary Update | December 2022
Important Disclosures
All data and figures as of 9/30/2022 unless otherwise indicated. The information contained herein has been prepared from sources believed to be reliable but is not
guaranteed and is not a complete summary or statement of all available data nor is it considered an offer to buy or sell any securities referred to herein. There is no assurance
that any securities discussed herein will remain in any account’s portfolio at the time you receive this report or that securities sold have not been repurchased. EquityCompass
Investment Management, LLC (“EquityCompass”) is a wholly owned subsidiary and affiliated SEC registered investment adviser of Stifel Financial Corp. SEC registration does
not imply a certain level of skill or training. Affiliates of EquityCompass may, at times, release written or oral commentary, technical analysis, or trading strategies that differ
from the opinions expressed within. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial
situation, or needs of individual investors.
This commentary often expresses opinions about the direction of market, investment sector, and other trends. The opinions should not be considered predictions of future
results. The information contained in this report is based on sources believed to be reliable, but is not guaranteed and not necessarily complete. All investments involve risk,
including loss of principal, and there is no guarantee that investment objectives will be met. It is important to review your investment objectives, risk tolerance, and liquidity
needs before choosing an investment style or manager. Equity investments are subject generally to market, market sector, market liquidity, issuer, and investment style risks,
among other factors to varying degrees. Fixed income investments are subject to market, market liquidity, issuer, investment style, interest rate, credit quality, and call risks,
among other factors to varying degrees. Rebalancing may have tax consequences, which should be discussed with your tax advisor. Diversification (or asset allocation) does
not ensure a profit or protect against loss. Foreign investments are subject to risks not ordinarily associated with domestic investments, such as currency, economic and
political risks, and different accounting standards. There are special considerations associated with international investing, including the risk of currency fluctuations and
political and economic events. Investing in emerging markets may involve greater risk and volatility than investing in more developed countries.
Any projections, targets, or estimates in this report are forward looking statements and are based on EquityCompass' research, analysis, and assumptions made by the
Adviser. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make
informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice.
Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 9.9 trillion indexed or benchmarked to the index, with indexed assets
comprising approximately USD 3.4 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization. The MSCI
ACWI Index captures large and mid cap representation across 23 Developed Markets and 21 Emerging Market countries. The index returns are presented on a total return
basis, which assume reinvestment of all cash distributions (such as dividends). With 2,434 constituents, the index covers approximately 85% of the global investable equity
opportunity set. The U.S. Dollar Index (DXY) is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S.
trade partners' currencies. The Index goes up when the U.S. dollar gains "strength" when compared to other currencies. The Bloomberg U.S. Treasury Index measures US
dollar-denominated, fixed-rate, nominal debt issued by the US Treasury. Treasury bills are excluded by the maturity constraint, but are part of a separate Short Treasury Index.
STRIPS are excluded from the index because their inclusion would result in double-counting. The Russell 1000 Growth Index measures the performance of those Russell 1000
index companies with higher price-to-book ratios and higher forecasted growth values. The Russell 1000 Value Index measures the performance of those Russell 1000 index
companies with lower price-to-book ratios and lower forecasted growth values. The volatility of the indices identified in this report may be materially different from the
volatility of the model portfolios presented by EquityCompass Strategies. Indices are unmanaged, do not reflect fees and expenses, and it is not possible to invest directly in
an index.
Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. As a
broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country’s economic health.
Real Gross Domestic Product (GDPCI) is the inflation adjusted value of the goods and services produced by labor and property located in the United States.
The Consumer Price Index (CPI) measures the change in prices paid by consumers for goods and services. The CPI reflects spending patterns for each of two population
groups: all urban consumers and urban wage earners and clerical workers.
The International Monetary Fund (IMF) works to achieve sustainable growth and prosperity for all of its 190 member countries. It does so by supporting economic policies
that promote financial stability and monetary cooperation, which are essential to increase productivity, job creation, and economic well-being.
*Total assets combines both Assets Under Management and Assets Under Advisement as of November 30, 2022. Assets Under Management represents the aggregate fair
value of all discretionary and non-discretionary assets, including fee paying and non-fee paying portfolios. Assets Under Advisement represent advisory-only assets where the
firm provides a model portfolio and does not have trading authority over the assets.
Past performance does not guarantee future performance or investment results.
Additional Information Available Upon Request
© 2022 EquityCompass Investment Management, LLC, One South Street, 16th Floor, Baltimore, Maryland 21202. All rights reserved.
1122.5173996.1
www.equitycompass.com 19About EquityCompass
EquityCompass Investment Management, LLC (“EquityCompass”) is a
Baltimore-based SEC registered investment adviser offering a broad
range of portfolio strategies and custom plans for individuals, financial
intermediaries, and institutional clients in the U.S. Formally organized in
2008, EquityCompass provides portfolio strategies with respect to total
assets over $4.6 billion as of November 30, 2022. EquityCompass is a
EquityCompass Investment Management, LLC wholly owned subsidiary of Stifel Financial Corp.
One South Street, 16th Floor The EquityCompass team of professionals represents deep industry
Baltimore, Maryland 21202 experience in security analysis, capital markets, and portfolio
(443) 224-1231 management. We are committed to a consistent investment process
email: info@equitycompass.com that relies on enduring principles, sound empirical reasoning, and the
www.equitycompass.com recognition of a dynamic investment environment with a global reach.You can also read
